The Difference Between Term and Permanent Life Insurance

Are you considering purchasing life insurance? If yes, then you should know that there are two major life insurance policies on the market: term and permanent. The decision to purchase one type of policy versus the other should be based on your lifestyle and financial situation as well as your age.

Term life insurance is the best option for those who seek a cheap and "bare bones" life insurance policy. Term life insurance offers death benefits only; if you outlive the policy, you receive no money in return. However, if you die while the policy is still in effect, your beneficiaries do receive a death benefit from the insurance company.

In contrast, permanent life insurance offers the same death benefit as term life insurance plus a cash benefit. In other words, there is cash value within permanent life insurance during your own lifetime. You may withdraw this money by cashing in your policy or you may take out a loan against it. However, permanent life insurance is significantly more expensive than term life insurance, with policy premiums often costing five to 10 times more than term life premiums.

Term life insurance has a finite end; generally, most term policies expire and cannot be renewed after age 75. Also, most term life insurance policies span from five to 30 years. With permanent life insurance, the policy can be renewed indefinitely. At first, the majority of the premium paid on permanent life insurance goes towards the insurance. Over time, however, more and more of the paid premium goes towards the cash value of the policy. Even with no further investment, the cash value of the policy generally increases because of dividends or other interest paid out by the insurance company.

Which insurance policy is better for you? That will depend on your lifestyle and financial requirements. If you are currently earning a good amount of money from your job and/or other investments, it may not pay to also be buying a permanent life insurance policy. If you are strapped for cash and/or may be opening a business very soon, permanent life insurance could be a better choice for you. Also, consider how your current investments are faring. If they are struggling, it may help to diversify your portfolio with permanent life insurance. Alternately, if you are doing quite well with your investments, placing your additional cash into someone else's hands may not be the best idea.

Overall, both term and permanent life insurance make for good investments for those who have families and dependents to support. By knowing the difference between these two policies, you will be better prepared to choose a policy that is right for you.